Do you use Paypal to accept funds? Do you live in the United States or otherwise have to pay taxes to the U.S. government? Then you should be aware of upcoming changes for Paypal and other payment processors resulting from the 2008 law IRS 6050W. In short, Paypal and those other processors might start tracking and reporting your income to the Internal Revenue Service (IRS).
Not every Paypal user will be affected, and the first reports to the IRS will happen in early 2012 (covering your 2011 income). Here’s some background on the 2008 law leading to these changes and what they might mean for you and your business.
Paypal will report your earnings to the IRS if you meet both of the following requirements:
This would affect any users in the U.S. or those with businesses registered in the U.S. It would also include those living overseas if they’re still U.S. citizens and required to report their earnings.
What if you have multiple Paypal accounts and they meet the requirements when combined, but not when counted separately? Paypal will still report your income to the IRS. So don’t think that using multiple accounts will get you around the reporting requirements.
If you are a citizen of another country and have absolutely no ties to the U.S. tax system, you shouldn’t be affected by the reporting change.
Also, if you only meet one of the two requirements listed above, you will not be affected.
The 1099 form series from the IRS is used to report income earned as an independent contractor or in other miscellaneous non-wage ways. Paypal will use 1099 forms to report income received through their system if you meet the requirements.
Start by reviewing the current year’s transactions to see if you meet the requirements. If you do, you’ll be asked to submit your identification number to Paypal for reporting purposes — your social security number (SSN), employer identification number (EIN), or taxpayer identification number (TIN).
Don’t assume you can get around the reporting requirements by switching to a different payment processor. The law doesn’t only apply to Paypal. Any payment processor you use will be required to report your earnings if you meet the requirements.
If you use a personal or premiere account with Paypal, you might also be required to upgrade to a business account if you meet the requirements. The account change is free.
If you don’t give Paypal the requested identification number, your Paypal account might be limited until you do. If you use other payment processors, check with them to find out how long you have to comply and what will happen if you don’t.
I’ll be affected by this change, and there are a couple of issues that come to mind — ones I haven’t seen adequately addressed elsewhere. Here’s some background so you’re aware of them as well.
Find out today if the new rules might apply to you. Visit Paypal’s reports page (like the one below — my personal earnings information was blocked out) and review your monthly sales reports. There you can find out how much you’re earning in 2010, and how many sales transactions you process each month.
In the end, you were always required to report your income, 1099 or not. So it shouldn’t affect you too greatly. But if you’re concerned about the potential reporting issues mentioned above, it’s strongly suggested that you speak to a financial services, legal, or tax professional for more personal advice.
If you’d like a preview of the new 1099 form that will be used, you can visit the IRS website to view a draft of the 1099-k.
Disclaimer: Information in this article is for educational purposes only, and neither the author nor the website’s owner may be held responsible for any real or perceived damage caused by, or allegedly caused by, the information contained in this article. The author is not engaged in offering legal, financial, or other professional services or advice. If further information or more individual information is needed, it is suggested that the reader consult with a qualified tax professional.
image via: paypal-media.com
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Hi- I have casually been selling things on ebay of years but NEVER sold $20,000 or 200 transactions in a year. Paypal has asked for the information a few times but since i do not meet the "2 requirements" i have not provided this information. I've since (last week) stopped selling on eBay because I do not know, even if I do not meet such 2 requirements, if paypal will hold my money!? Like I said, been selling only as a hobby and just for play money and never make enuf to even try to do it full time or even consider making more. I know many do use paypal as a venue for sales and buying, and that's fine for a bonfide business but why is paypal bugging me? I called them and they said not all are involved in needing to give the information and yet everyone was given the email to give their EIN or SS# to paypal. Makes no sense. They still wanted mine (via word) even tho I do not meet the 2 requirements. THAT bothered me big time. So in frustration, I'll donate all the things I was going to sell, keep a few and write off the values on these things. It's very discouraging....
yep.. the government doing a great job at making life hell and destroying the economy
OK first off not selling on ebay. But I use PP to receive payments from people in groups I belong to. I buy items and if they don't work for me re-sell them to others. I use PP because it's fast and it allows people from anywhere to buy or sell to me. I am not a business. This is strictly a hobby deal. But because I arranged some Group Orders to companies over seas to save on shipping even get free I feel I am being punished. To me I am just taking X$ to buy something then re-sell it never at a profit, always less then I paid or if lucky I break even. I gave PP my SS#, I downloaded now 4 months of my statements as well as took the time to copy and paste the first 5 months of 2011. All because I thought this rule would not effect me. But I am guessing since they want not just amounts of what I sold, but also went I spent. Not Fair!
If you receive money through Paypal because you're selling something, then you might be subject to the rules. From what I've seen it has nothing to do with how much you spend. Revenue is only related to the amount you earn -- those incoming payments. It's also important to note that Paypal themselves isn't taxing anyone. They're simply reporting the revenue to the IRS. The IRS lets you know how much you owe, and you pay it directly to them. Paypal just sends them a form.
OK Just want to clarify. I keep seeing the word Revenue like it's money I get through PP not money I spend. So if it's only money I get I am I think OK, but if it's both that would be a terribel thing as then wouldn't they tax me and the person I buy from?
If i dont withdraw money form paypal to bank account will paypal report to IRS ?
They report your income paid through the service; not what you withdraw. So yes, it would be reported.
Paypal also does what they call "Payment Holds" for 21 days until your item is shipped and then it is released back into your account. I guess my main questions would be if when those "payment releases" are taken off "Hold" and the Net amount put back in my account 21 days later, is that amount added to the $20,000 as well? That would almost be doubling the amount of one transaction. $20 now became $39 minus Paypal fees. So for example, the gross amount was put in my account initially, then taken out to be put on hold and then the Net put back into my account 21 days later, however the Net shows up in the gross column as well. It's really frustrating when you're trying to figure out the amounts for the year, so how do you know whether to add it towards the gross or not? What's more confusing is that in the "Monthly Financial Summary Report", the payment releases show up in the credit column. Is the release amount just there for reference? Do I go by my "Payments Received" for the gross amount and nothing else? Also, does the monthly cash back from using your Paypal card add in to the equation?
That shouldn't be an issue. A hold should be tied to the primary transaction -- kind of like multiple parts of the same sale. It's more about tracking where the money is during the transfer and to the best of my knowledge it shouldn't be counted as additional revenue. It should be counted either when a sale is made or when money is finally deposited into the account -- not both. I don't know which of those things they go by though, so I'd suggest speaking with a Paypal rep about it to discuss the types of transactions you engage in for your specific case.
Thank you so much for your response Jennifer. I almost forgot! Do bank transfers from your personal account into Paypal count towards the gross? Basically I'm just going by whatever says "Payments Received" in the download history and nothing else. I'm guessing this is what Paypal is going by as well? Because like I said in my last post, the net from those holds show up in my gross column along with the initial payment. That would be double reporting on one item and what a headache that would be to sort out! So many questions! :-)
The hold and the actual transfer are two parts of the same transaction. Holds should eventually be released. On the outgoing side of things I've had some problems in the past where a hold was taken, then the charge actually processed, and the hold wasn't released (taking things out of the account twice). This only happened with debit card use tied to the account, and happened rarely. If you're seeing two active things affecting your balance for the same transaction, you should give them a call. They've always been able to check and fix the issue promptly for me. You might be seeing something similar.
I don't see why a deposit from your linked bank account would be counted as revenue. Their site specifically says this only applies to the sale of goods or services, which a bank transfer from your own account wouldn't be.
Thank you again Jennifer. You are very helpful. I'll give them a call just to make sure that's not happening to me. As for the bank transfers, I only ask because in the Monthly Financial report, the money going into the Paypal account from the bank is on the credit side of the statement which made me believe that may be taken into account.
Personal payments you receive from others would work like that too, and Paypal's FAQ (linked above) was updated quite a while ago to say they won't include personal payments -- only payment for goods and services. So if they can weed out personal payments, I don't see why they couldn't weed out your own bank transfers too. So I'm sure there's nothing to worry about. But yes, it's always better to call and ask them directly. :)
If you go to filter by Payments Received, which is what should be what is reported as income by Paypal, it does not include Bank Transfers as this is not a "Payment Received", it is a transfer of funds between your personal bank accounts. So it should not be included on any 1099 form, as you are not paying yourself. However, you can also make payments through Paypal from your bank account without ever transferring the funds first, so then it is just a straight payment. As for personal payments, "Gifts" are also taxable per IRS regulations and there is a place to report them on your tax forms, so if you are being Gifted any significant amount over the course of the year, it is best not to take the chance of not reporting, especially if you are also receiving a 1099 already from Paypal that links that account for IRS review if you are a lucky one chosen for audit. Personal income is not exempt, it is just reported differently.
Hello,
If I have PayPal and also use Google’s payment processing system and take in $17000 in Paypal and $4000 in Google trough the year. Is that a possibility, or do they have ties that would prevent this workaround?
I'm sorry, but I cannot give anyone information in an effort to "work around" this reporting, as that is admittedly an attempt to circumvent the law (your taxes should be reported by you whether or not a payment processor also submits documentation). You'll need to make those kind of ethical and business decisions independently.
Jennifer Mattern, the IRS has no lawful right to take income tax from the American people. They are criminal frauds. Do your homework. I don't know yet if there is a way to work around this issue, for those of us who rightfully stand against having to pay income tax. Perhaps dealing in cash is the only way.. unfortunately cash is becoming obsolete. We have to collectively stand up to these guys or they are going to intimidate us into a fascist state. If everyone buckles their knees and gives in to this, we are inviting the state of nazi germany into america, and i am not kidding. did you know fema has been building concentration camps on American soil? we are becoming less and less free all the time - stop pretending like this is all okay - look at what is happening - do your homework, find out the truth, it is very important!
You're entitled to your opinion ceasar, but your comment is completely outside the scope of this article. We're not interested in politics and whether or not people like the income tax system or feel like they should have to abide by it. This article deals exclusively with payment processor reporting requirements, and we will not do or say anything to encourage people to circumvent current laws.
Hello Jennifer Mattern
I currently reside and live in Peru and am not a citizen of Us.My paypal account is peruvian Will I need to report and pay Us taxes for services?
I do not have a ssn, tin or ein.
I have already contacted paypal but do not have accurate information about foreign accounts paypal
thanks for you help
I'm sorry, but anything about your individual account will need to be taken up with Paypal directly. If you've contacted them, they would have been the best people to give you accurate information based on the details of your account and how it's used.
I just start selling some not going to use stuff on ebay on OCT 2011. and I found that who selling more then 200 translation and make $20,000 will be report their TAX. but what if I didn't make $20,000 in 2011 but sell more then 200 translation? am I have to report tax too? all stuff are usually under $20 for each translation and if i will pay tax for those garbage sale will = nothing @@? well.. pleas help me this question. thank you.
If you live in the US, you have to pay taxes on that amount even if Paypal isn't required to report the income. You still are required to report it yourself. If you live elsewhere, you have to abide by your own country's tax laws. Unless you meet both requirements mentioned ($20,000 and 200 transactions) Paypal isn't required to report anything on their end.
Actually, that is not accurate. Personal payments DO count toward the 20K/200 payment limits. Bank transfers (as in transferring from your bank into your Pay Pal account) do not, obviously, as that would be like transferring money between bank accounts. However, personal payments DO count, payments for shipping DO count. Any time a dollar is going into your account from another individual or business, it counts toward the 20K and each single payment counts toward the 200 mark.
Further, be aware of this, REFUNDS are tricky here, too. Let's say I make a $500 sale, but there was some mistake where the buyer was overcharged or changed the order. I refund the $500 and the buyer sends me $400 back. That counts as $900 toward the 20K limit, since you received $900, even though you refunded $500. Pretty stupid but I was told that this is the case.
I'm sorry Ricky, but that is incorrect. Personal payments are not included. Please review the official documentation from Paypal linked in the article above. They address this issue directly, noting that only payments for the sale of goods and services count. They also go on to outright say that personal payments are not factored in.
"No. Personal payments that are not payments for the sale of goods or services will not be counted in the total to be reported. "
You are, however, right about refunds. That's a part of net figures whereas they're required to report gross payments received. I agree that's pretty stupid, and hopefully it will change in the future.
you have been very helpful jennife, but only at translating paypals details. there is the info and then the truth. search around the net they are stating a lot and are absolutely lying about it all. for an example, a friend did not hit neither of the 20/200 and the sent a form.
another was emailed and told he was approaching the threshold and immediately stopped that second. they still sent one. they told him it was due to personal tranfers that they clearly state are not included. how is there not going to be a class act against the way they are handling this, i have no idea. if they would do as they say and not lie, it would be different but the have lied to everyone.
and thousands if not millions will pay. i understand why. i understand the laws and why. but someone making 20k a year..... probably still in poverty.